Asean countries vulnerable to China ‘hard landing’

Countries in the Asean region, including the Philippines, will be vulnerable to any sharp slowdown in China’s economy given their strong bilateral trade with Asia’s largest economy, and such hard landing is possible in the next three years, a US think tank said.

With exports to China having grown at an average 20 percent a year over the last decade, the Asean region has become more vulnerable to a China hard landing than to any crisis in the US and Europe, according to a new analysis by IHS Inc., a global provider of critical information, research, and insight, released at the World Economic Forum on Tuesday.

A China hard landing scenario, as described by IHS, assumes a severe tightening of credit conditions, a housing market crash and default by major real estate developers.

It also assumes a drop in confidence by domestic and international investors, it said.

This is followed by cutbacks in fixed investment and consumption, a slowing of real exports of goods and services, and significant erosion in domestic demand, causing China to experience deflation in 2015, according to that scenario.

“A hard landing in the Chinese economy is one of the key risks facing the global economy in 2014 to 2015 and our economic model shows that there is a one-in-three risk of this scenario happening in the next three years,” Rajiv Biswas, Asia Pacific chief economist for IHS, said in a speech on the opening day of the three-day WEF being held in the Philippines.

Using its own “Global Link” model, IHS found that a Chinese hard landing scenario would lower the global gross domestic product (GDP) growth by 0.1 percentage point in 2014 and 0.5 percentage point in 2015 and again in 2016.

“Asean as a region is particularly vulnerable to a China hard landing scenario due to the rapid growth in bilateral trade and investment with China over the last decade,” Biswas said.

He added that Asean exports to China have grown at an average pace of 20 percent a year over the last decade.

“That has helped cushion the Asean from weak growth in the key export markets of the US and EU during the global financial crisis, but it has also created greater vulnerability to a China hard landing,” Biswas noted.

He said the manufacturing supply chain of countries such as the Philippines is susceptible to the impact of a hard landing in the world’s second largest economy.

“Asean nations are increasingly integrated into the East Asian manufacturing supply chain, and the manufacturing sectors of Malaysia, Singapore, Thailand and the Philippines would be hit by shock waves from the impact of a China hard landing on Chinese consumer demand,” Biswas added.

“Asian commodity exporters would also suffer from a slump in Chinese demand for commodities, which could also push commodity prices lower,” he said.